LendingTree, Inc. (NASDAQ:TREE) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

LendingTree, Inc. (NASDAQ:TREE) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 69% in the last year.

Although its price has surged higher, it's still not a stretch to say that LendingTree's price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the Consumer Finance industry in the United States, where the median P/S ratio is around 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for LendingTree

How Has LendingTree Performed Recently?

LendingTree hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on LendingTree.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, LendingTree would need to produce growth that's similar to the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. As a result, revenue from three years ago have also fallen 26% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 6.8% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 15% each year, which is noticeably more attractive.

With this in mind, we find it intriguing that LendingTree's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does LendingTree's P/S Mean For Investors?

Its shares have lifted substantially and now LendingTree's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given that LendingTree's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Having said that, be aware LendingTree is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.